Globaltrans Investment PLC. Consolidated Management report and consolidated financial statements for the year ended 31 December 2017

Transcription

1 Consolidated Management report and consolidated financial statements for the year ended 31 December 2017

2 Contents Consolidated Management report and consolidated financial statements for the year ended 31 December 2017 Board of Directors and other officers... 1 Consolidated Management Report... 2 Directors responsibility...13 Independent Auditor s Report Consolidated income statement...23 Consolidated statement of comprehensive income Consolidated balance sheet Consolidated statement of changes in equity Consolidated cash flow statement General information Basis of preparation and summary of significant accounting policies Financial risk management Critical accounting estimates and judgements Segmental information Non-GAAP financial information Expenses by nature Other gains net Employee benefit expense Finance income and costs Income tax expense Net foreign exchange losses Property, plant and equipment Intangible assets Investments Share-based payments Financial instruments by category Credit quality of financial assets Trade and other receivables Inventories Cash and cash equivalents Share capital and share premium Dividends Borrowings Deferred income tax Trade and other payables Earnings per share Contingencies Commitments Related party transactions Events after the balance sheet date... 80

3 Board of Directors and other officers Board of Directors Mr. Michael Zampelas Chairman of the Board of Directors Independent non-executive Director Member of Remuneration and Nomination Committees Dr. Johann Franz Durrer Senior Independent Non-Executive Director Chairman of the Remuneration and Nomination Committees Mr. John Carroll Colley Independent Non-Executive Director Chairman of the Audit Committee Mr. George Papaioannou Independent Non-Executive Director Member of the Audit Committee Ms. Elia Nicolaou Non-executive Director Member of the Audit Committee Company Secretary Secretary of the Board Alternate Director: Mr. Marios Tofaros Mr. Alexander Eliseev Executive Director Alternate Director: Ms Ekaterina Golubeva Mr. Marios Tofaros Non-executive Director Mr. Sergey Tolmachev Executive Director Mr. Alexander Storozhev Executive Director Alternate Director: Ms. Elia Nicolaou Mr. Konstantin Shirokov Executive Director Mr. Alexander Tarasov Non-executive Director Alternate Director: Mr. Maxim Rubin Mr. Michalakis Thomaides Non-Executive Director Ms. Melina Pyrgou Non-executive Director Mr Andrey Gomon Non-executive Director Appointed on 24 April 2017 Alternate Director: Ms. Melina Pyrgou Ms Zarema Mamukaeva Non-executive Director Resigned on 24 April 2017 Alternate Director: Ms. Melina Pyrgou Board support The Company Secretary is available to advise all Directors to ensure compliance with the Board procedures. Also a procedure is in place to enable Directors, if they so wish, to seek independent professional advice at the Company s expense. Company Secretary Ms. Elia Nicolaou Dimitriou Karatasou, 15 Anastasio Building, 6th floor, Office 601 Strovolos, 2024, Nicosia, Cyprus Assistant secretary: Mr. Marios Tofaros Registered office 20 Omirou Street Agios Nicolaos CY-3095 Limassol, Cyprus Consolidated management report and consolidated financial statements for the year ended 31 December

4 Consolidated Management Report The Board of Directors presents its report together with the audited consolidated financial statements for the year ended 31 December The Group s financial statements have been prepared in accordance with International Financial Reporting Standards (IFRS) as adopted by the European Union and the requirements of Cyprus Companies Law, Cap Principal activities The principal activity of the Group which is unchanged from last year is the provision of railway transportation services using own and leased rolling stock as well as fleet engaged from third party rail operators and operating lease of rolling stock. Review of developments, position and performance of the Group s business Globaltrans produced a solid overall financial performance in The recovery in gondola car segment translated into a strong set of results, despite the weaker market for oil product and oil transportation. IFRS financial information Management considers amongst others the following IFRS measures in analysing the performance of the Group. The Group s Total revenue rose 12% year on year to RUB 78,080,532 thousand in 2017 (2016: RUB 69,487,991 thousand). The Group s Operating profit rose 86% year on year to RUB 20,156,135 thousand in 2017 (2016: RUB 10,824,278 thousand). The Profit of the Group for the year ended 31 December 2017 grew 126% year on year to RUB 13,819,874 thousand (2016: RUB 6,114,912 thousand). On 31 December 2017 the total assets of the Group were RUB 77,421,556 thousand (2016: RUB 78,430,489 thousand) and net assets were RUB 50,617,630 thousand (2016: RUB 53,208,258 thousand). On 31 December 2017 the total debt of the Group was RUB 16,331,356 thousand and increased by 0.24% as compared to end of 2016 which amounted to RUB 16,292,469 thousand. Total cash and cash equivalents on 31 December 2017 grew by 4% and amounted to RUB 4,966,171 thousand (31 December 2016: 4,773,414 thousand). Non-IFRS financial information Amongst others, management analyses the following key non-ifrs measures. The definitions to these non-ifrs measures are marked with capital letters and their definitions are provided at the end of this section in alphabetical order. Adjusted Revenue increased 18% year on year to RUB 52,094,289 thousand (2016: 44,248,568 thousand) supported by the strong performance of the gondola business. Total Operating Cash Costs were down 1% year on year to RUB 26,302,818 thousand (2016: 26,489,774 thousand). Adjusted EBITDA rose 46% year on year to RUB 25,788,683 thousand (2016: 17,676,600 thousand) with the Adjusted EBITDA Margin expanding to 50% (2016: 40%). The Group Free Cash Flow rose 92% year on year to RUB 17,047,982 thousand (2016: RUB 8,882,205 thousand). The Group had a strong balance sheet with Net Debt to Adjusted EBITDA further improved to 0.4x (2016 end: 0.7x). Net Debt was reduced by 1% to RUB 11,365,185 thousand (2016 end: RUB 11,519,055 thousand). 100% of the Group s debt was denominated in Russian roubles. In 2017, management continued to make disciplined decisions on capital allocation whilst pursuing cost improvement and productivity measures. Operational information In 2017, the Group s Freight Rail Turnover (excl. Engaged Fleet) remained stable year on year at billion tonneskm (2016: billion tonnes-km). Average Price per Trip improved increasing 20% year on year. The high operational efficiency was maintained with the Empty Run Ratio for gondola cars improved to 37% (2016: 38%) and the Total Empty Run Ratio improved to 45% (2016: 48%). Consolidated management report and consolidated financial statements for the year ended 31 December

5 The railcar turnover improved with the Average Number of Loaded Trips per Railcar up 2% year on year, while the Average Distance of Loaded Trips remained unchanged year on year. Total Fleet decreased to 66,692 units (2016 end: 68,511 units) primarily reflecting an intended decrease in the number of leased-in rail tanks. The financial position, development and performance of the Group as presented in the financial statements is considered satisfactory. Definitions to Non-IFRS financial measures Adjusted EBITDA represents EBITDA excluding Net foreign exchange transaction losses from financing activities, Share of loss of associate, Other gains - net, Net (gain)/loss on sale of property, plant and equipment, Impairment of property, plant and equipment, Loss on derecognition arising on capital repairs and Reversal of impairment of intangible assets. Average Price per Trip is calculated as Net Revenue from Operation of Rolling Stock divided by the total number of loaded trips during the relevant period in the respective currency. Net Revenue from Operation of Rolling Stock (a non- GAAP financial measure) is defined as the sum of Revenue from railway transportation - operators services (tariff borne by the Group) and Revenue from railway transportation - operators services (tariff borne by the client) less Infrastructure and locomotive tariffs: loaded trips, Services provided by other transportation organisation and net revenue from engaged fleet (a non-gaap financial measure). EBITDA (a non-gaap financial measure) represents Profit for the year before Income tax expense, Finance costsnet (excluding Net foreign exchange transaction losses from financing activities), Depreciation of property, plant and equipment and Amortisation of intangible assets. Empty Run Ratio is calculated as the total of empty trips in kilometres by respective rolling stock type divided by total loaded trips in kilometres of such rolling stock type. Empty trips are only applicable to rolling stock operated (not including rolling stock in maintenance, purchased rolling stock in transition to its first place of commercial utilisation, rolling stock leased out, engaged fleet, platforms and tank containers used in petrochemical business). Engaged Fleet is defined as rolling stock subcontracted or otherwise engaged from a third-party rail operator for a loaded trip from the point of origination to the cargo s destination, at which point the railcar is then released to such third-party. Free Cash Flow is calculated as Cash generated from operations (after Changes in working capital ) less Tax paid, Interest paid, Purchases of property, plant and equipment and Purchases of intangible assets. Freight Rail Turnover is a measure of freight carriage activity over a particular period calculated as the sum of tonnage of each loaded trip multiplied by the distance of each loaded trip, expressed in tonnes-km. It includes volumes transported by the engaged fleet and excludes performance of petrochemical tank container segment, unless otherwise stated. Net Debt (a non-gaap financial measure) is defined as the sum of total borrowings (including interest accrued) less Cash and cash equivalents. Net revenue from engaged fleet (a non-gaap financial measure) represents the net sum of the price charged for transportation to clients by the Group utilising Engaged Fleet less the loaded railway tariff charged by OAO Russian Railways (included in Infrastructure and locomotive tariffs: loaded trips ) less the cost of attracting fleet from thirdparty operators (included in Services provided by other transportation organisations ). Total Empty Run Ratio is calculated as total kilometres travelled empty divided by the total kilometres travelled loaded by the rolling stock fleet operated by Globaltrans (not including the relocation of rolling stock to and from maintenance, purchased rolling stock in transition to its first place of commercial utilisation, or rolling stock leased out, Engaged Fleet, platforms and tank containers used in petrochemical business) in the relevant period. Total Fleet is defined as the fleet owned and leased in under finance and operating leases as at the end of reporting period. It includes railcars, locomotives and petrochemical tank containers, unless otherwise stated, and excludes engaged fleet. Total Operating Cash Costs represent operating cost items payable in cash and calculated as Total cost of sales, selling and marketing costs and administrative expenses less the pass through items: Infrastructure and locomotive tariffs: loaded trips and Services provided by other transportation organisations and non-cash items: Depreciation of property, plant and equipment, Amortisation of intangible assets, Impairment charge for receivables, Impairment of property, plant and equipment, Net (gain)/loss on sale of property, plant and equipment and Loss on derecognition arising on capital repairs. Consolidated management report and consolidated financial statements for the year ended 31 December

6 Changes in group structure There were no changes in the Group structure of the Company during the year ended 31 December 2017, with the exception of the disposal of the investment in associate (Note 15.1). For the principal subsidiaries of the Group, refer to Note 15.2 of the consolidated financial statements. Non-Financial Information and Diversity Statement The Group will be publishing its first Non-Financial Information and Diversity Statement within its Annual report that will be issued within four months after the balance sheet date and will be available on the Company s website, Environmental matters Rail is one of the most environmentally friendly modes of transport. Nonetheless, any commercial activity has an environmental impact and Globaltrans strives to minimise those from its operations where possible. To this end, the Group ensures that its activities fully comply with local environmental regulations. It also aims to help business and nature co-exist by focusing on applying modern technology in its operations and using natural resources rationally. Human resources Globaltrans considers the wellbeing of employees central to its success and strives to maintain exemplary working standards, ensure job satisfaction and create opportunities for professional growth. The Group s personnel policy focuses on creating a positive atmosphere at all offices and facilities to maximise productivity. As part of this, it offers medical insurance, support for education, opportunities to obtain additional qualifications and training, and financial aid in particularly difficult times. The Group s future success will partly depend on its ability to continue to attract, retain and motivate key employees and qualified personnel, in particular an experienced management team. Competition in Russia for such personnel with relevant expertise is intense due to the small number of qualified individuals with suitable practical experience in the rail industry. Adequate remuneration packages, which are in line with or in excess of market levels, are offered to all employees and key managers and remuneration is linked to the Group s financial results. The Human Resource function regularly monitors salary levels and other benefits offered by competitors to ensure that the Group s remuneration packages are adequate. Principal risks and uncertainties The Company faces a number of diverse potential and actual risks to its business. The Board has adopted a formal process to identify, evaluate and manage principal risks and uncertainties faced by the Group. To identify, evaluate and mitigate these, the Group has established an in-house system to monitor and control uncertainties and threats throughout its activities. This is overseen by a dedicated Risk Management function, which works directly with the Board of Directors in this area. The Company has grouped the risks that it considers to be significant into key categories strategic, operational, compliance and financial and they are presented below. Strategic risks The strategic risks faced by the Group that pose risks that influence the Group s ability to achieve its strategy include the general economic situation and operating environment in Russia, Kazakhstan, Ukraine, CIS and Baltic countries in which the Group operates; the regulatory risk relating to the operation of the Russian railway transportation market including railway tariff regulation and technical requirements for fleet maintenance; the highly competitive Russian rail transportation market with unregulated operator s services tariffs; the oversupply of railcars on the market; the significant concentration of the Group s customer base with the top 10 customers accounting for around 74% of the Group s Net Revenue from the operation of rolling stock in 2017; cost of borrowing and/or deterioration in market conditions with potential impacts on the profitability and payback period of investments; and reliance on RZD for issuing permits allowing the Group to operate locomotives. Consolidated management report and consolidated financial statements for the year ended 31 December

7 The Group operates mainly in Russia, other emerging markets and Estonia. Emerging markets, such as Russia, Kazakhstan and Ukraine, are subject to greater risks than more developed markets, including significant economic, political, social, legal and legislative uncertainties. Moreover, the Group s business depends on the demand in the Russian freight rail transportation market, which in turn depends on certain key commodity sectors and, accordingly, on economic conditions in Russia, Europe and elsewhere. A decrease in production and demand for key commodities in Russia, or in adjacent countries where the commodities of the Group s key customers are shipped by rail, as a result of a technological shift, economic downturn, political crisis or other event in Russia or another relevant country, negatively impacts the Group s business and growth prospects. The management of the Group constantly monitors the developments in the operating environment and regulatory regime of the railway transportation market in the countries in which the Group operates. The Group s business model is to maintain a balanced fleet between universal gondola cars, adaptable to the demand for transportation of various bulk cargoes and rail tank cars, which are used for the transportation of oil products and oil. Further, the Group has long-term, established relationships with its key customers and their affiliates and suppliers and in some cases, the Group becomes an integrated part of its customers operations. Around 55% of the Group s Net Revenue from the Operation of Rolling Stock in 2017 was covered by long-term service contracts with several large clients. Such contracts provide additional stability and greater certainty regarding transport volumes for the Group. In addition, the Group s marketing function regularly monitors competitors strategies, their use of technology, their price strategies and industry trends. Operational risks The operational risks faced by the Group that could influence the Group s operational efficiency include the physical state of the Russian, Ukrainian, CIS and Baltic countries railway infrastructure which may negatively impact the condition of the Group s rolling stock and the performance of the Group; the impact of inflation in Russia on the Group s costs with limited opportunities to increase tariffs to customers; the competition for personnel with relevant expertise and experience in Russia and the impact on the Group s ability to continue to attract, retain and motivate key employees and qualified personnel; reliance on RZD for locomotive traction and infrastructure usage and the impact of this on the quality of the Group s freight transportation services and therefore customer satisfaction; IT availability and continuity considerations due to reliance on specialised trail transport and logistics software for ensuring efficient and effective logistics, dispatching and rolling stock tracking services; and risks of terrorist attacks, natural disasters or other catastrophic events beyond the Group s control. The Group is managing operational risk by ensuring that practically all of the Group s rolling stock is insured against damage. Further, the Group monitors its rolling stock through the Group s dispatch centre on a 24/7 basis and plans routes accordingly to minimise the risks of disruption. The Group monitors FAS initiatives with the aim of detecting possible changes in tariff-setting methodology and tries to reflect respective changes in contracts with customers. Among the Group s key objectives are to increase operational efficiency and to focus on control and reduction of costs. The Group continuously monitors its costs to maintain efficiency. The Human Resource function regularly monitors salary levels and other benefits offered by competitors to ensure that the Group s remuneration packages are adequate. Customer satisfaction is one of the key metrics that the Group s management monitors, with customer feedback being analysed and appropriate follow-up actions being taken. Local IT specialists have introduced solutions to maintain the availability of IT services and ensure their recovery in case of disruption. The IT function and Internal Audit function monitor all IT-related activities and performance for compliance with IT policies and procedures. Further the Group permanently monitors any disruptive events and applies a Business Continuity Policy to ensure the safety of employees and human life; maintain continuity of time-critical services; minimise disruptions to clients and partners; and minimise operational, financial and reputational impact. Compliance risks The Group is also subject to compliance risk, being the risks that influence the Group s adherence to relevant laws and regulations. The Group is involved in material legal action from time to time. Some of it may have an adverse effect on the Group. The ambiguity of the law in Russia and CIS countries creates regulatory uncertainty and might result in claims from different government authorities. Local tax, currency and customs legislation, especially in Russia, other emerging markets and Cyprus, may be subject to varying interpretations, inconsistencies between federal laws, regional and local laws, rules and regulations, frequent changes and a lack of judicial and administrative guidance on interpreting legislation. The Group runs its operations in compliance with tax, currency, labour, customs, antimonopoly and other applicable legislation and constantly monitors any changes in the regulatory environment as well as compliance with the terms of its agreements. Standard forms of agreements are used for transportation services, and various controls are in place to ensure that the terms of agreements are adhered to. All contracts are subject to rigorous review by all of the Group functions concerned and a formal approval process prior to execution. The Group has controls in place, including highly qualified and experienced personnel, to monitor changes in legislation and determine the appropriate action needed to minimise the risk of a challenge to such treatments by the authorities. For complex matters, the Group retains external consultants. Consolidated management report and consolidated financial statements for the year ended 31 December

8 Financial risks The Group s activities expose it to a variety of financial risks that could influence the Group s financial performance. These include: market risk (including currency risk, fair value interest rate risk and cash flow interest rate risk), credit risk and liquidity risk. Foreign exchange risk Currently, the Group has no borrowings denominated in US dollars and therefore has limited exposure to the effects of currency fluctuations between the US dollar and Russian Rouble. The Group is exposed to the effects of currency fluctuations between (i) the Russian Rouble and the US Dollars in relation to US Dollar denominated balances held in the Company and the Cypriot and Russian subsidiaries of the Group having the Russian Rouble as their functional currency; (ii) the Euro and the US Dollar for US Dollar denominated balances held in the Estonian subsidiaries of the Group which have the Euro as their functional currency and (iii) the Ukrainian Hryvnia and the US Dollar for the US Dollar denominated balances held in the Ukrainian subsidiary of the Group which has the Ukrainian Hryvnia as its functional currency. A large proportion of the Group s revenues and expenses are denominated and settled in Russian roubles. At present, the risks related to liabilities denominated in foreign currency are not material and are partly compensated by assets and income denominated in foreign currency. The Group has refinanced all of its US dollar-denominated liabilities with long-term debt denominated in Russian roubles and as of 31 December % of the Group s debt was denominated in Russian Roubles. Had US Dollar exchange rate strengthened/weakened by 5% against the Russian Rouble and all other variables remained unchanged, the post-tax profit of the Group for the year ended 31 December 2017, would have decreased/increased by RUB 11,888 thousand (2016: 30% change, effect RUB 301,930 thousand) and equity would have increased/decreased by RUB 125,368 thousand (2016: 30% change, effect RUB 808,361 thousand). This is mainly due to foreign exchange gains and losses arising upon retranslation of cash and cash equivalents and accounts payable denominated in US Dollars for the Group entities with Russian Rouble being their functional currency. The impact on equity is mainly due to foreign exchange gains and losses arising upon retranslation of intercompany loans being recognised as part of net investment in the foreign operation denominated in US Dollars for the Ukrainian subsidiary of the Group. Had Euro exchange rate strengthened/weakened by 10% against the US Dollar and all other variables remained unchanged, the post-tax profit of the Group for the year ended 31 December 2017, would have increased /decreased by RUB 28,517 thousand (2016: 10% change, effect RUB 22,779 thousand). This is mainly due to foreign exchange gains and losses arising upon retranslation of payable balances and cash and cash equivalents and accounts receivable denominated in US Dollars for the Estonian subsidiaries of the Group. Had US Dollar exchange rate strengthened/weakened by 10% against the Ukrainian Hryvnia and all other variables remained unchanged, the post-tax profit of the Group would have remained unchanged (2016: 30% change, no effect on post-tax profit) and the equity of the Group for the year ended 31 December 2017, would have decreased/increased by RUB 250,735 thousand (2016: 30% change, effect RUB 808,361 thousand). This is mainly due to foreign exchange gains and losses arising upon retranslation of intercompany loans being recognised as part of net investment in the foreign operation denominated in US Dollars for the Ukrainian subsidiary of the Group. Interest-rate risks The Group s income and operating cash flows are exposed to changes in market interest rates. These arise mainly from floating rate lease liabilities and borrowings. An increase in market interest rates in Russia may negatively influence the Group s profits. As of 31 December 2017, the proportion of total debt with a fixed interest rate amounted almost to 100%. The Group concludes long-term borrowing and finance lease contracts to finance purchases of rolling stock and acquisitions of subsidiaries. The Group borrows at current market interest rates and does not use any hedging instruments to manage interest-rate risk. Management monitors changes in interest rates and takes steps to mitigate these risks as far as practicable by ensuring that the Group has financial liabilities with both floating and fixed interest rates. As of 31 December 2017, the proportion of total debt with a fixed interest rate amounted to almost 100%. Consolidated management report and consolidated financial statements for the year ended 31 December

9 Credit risk Financial assets that potentially subject the Group to credit risk consist principally of trade and other receivables and cash and cash equivalents. Furthermore, the Group s business is substantially dependent on a few large key customers, including its affiliates and suppliers. Its top 10 clients accounted for 74% of the Group s trade and other receivables on 31 December The Group has policies in place to ensure that sales of goods and services are made to customers with an appropriate credit history. The majority of bank balances are held with reliable banks. Liquidity risk The Group s business is capital-intensive. The political turmoil experienced within Ukraine and sanctions imposed by the United States and the European Union on Russia have had a negative impact on the Russian financial markets and may limit the Group s access to international sources of funding. The potentials lack of available funding from international and Russian sources and increase in market interest rates could have a negative impact on the Group s ability to obtain financing for the settlement of its liabilities or cash to meet its financial obligations. The Group has a budgeting policy in place that allows the management to control current liquidity based on expected cash flows. These include, among others, operating cash flows, capital expenditure needs, funds borrowed from financial institutions and funds raised from listed debt instruments. Contingencies The Group s contingencies are disclosed in Note 28 to the consolidated financial statements. Future developments The Board of Directors does not expect any significant changes in the activities of the Group for the foreseeable future. The Group s strategic objective is to strengthen its position as a leading private freight rail group in Russia. Results The Group s results for the year are set out on pages 23 and 24. The Board of Directors recommends the payment of a dividend as detailed below and the remaining net profit for the year is retained. Dividends Pursuant to its Articles of Association the Company may pay dividends out of its profits. To the extent that the Company declares and pays dividends, owners of Global Depositary Receipts (GDRs) on the relevant record date will be entitled to receive dividends payable in respect of Ordinary Shares underlying the GDRs, subject to the terms of the Deposit Agreement. The Company expects to declare dividends in Russian Roubles and pay such dividends in US Dollars. If dividends are not paid in US Dollars, except as otherwise described under Terms and Conditions of the Global Depositary Receipts Conversion of Foreign Currency, they will be converted into US Dollars by the Depositary and paid to holders of GDRs net of currency conversion expenses. The Company is a holding company and thus its ability to pay dividends depends on the ability of its subsidiaries to pay dividends to the Company in accordance with relevant legislation and contractual restrictions. The payment of such dividends by its subsidiaries is contingent upon the sufficiency of their earnings, cash flows and distributable reserves. The maximum dividend payable by the Company s subsidiaries is restricted to the total accumulated retained earnings of the relevant subsidiary, determined according to the law. In April 2016, the shareholders of the Company approved the payment of the final dividend in respect of the financial year ended 31 December 2015 in the amount of Russian Roubles per ordinary share/gdr, amounting to a total dividend of RUB 2,218,175 thousand (US Dollar equivalent of US$ 34,041 thousand). In April 2017, the shareholders of the Company approved the payment of the final dividend in respect of the financial year ended 31 December 2016 in the amount of Russian Roubles per ordinary share/gdr, amounting to a total dividend of RUB 7,006,644 thousand (US Dollar equivalent of US$ 124,605 thousand). Consolidated management report and consolidated financial statements for the year ended 31 December

10 In August 2017, the Board of Directors of the Company approved payment of total dividend in the amount of 44.8 Russian Roubles per ordinary share/gdr, amounting to a total dividend of RUB 8,007,593 thousand, including interim dividend in the amount of RUB 3,603,417 thousand or RUB per ordinary share/gdr and a special interim dividend in the amount of RUB 4,404,176 thousand or RUB per ordinary share/gdr (US Dollar equivalent of US$ 135,401 thousand). On the date of this report, the Board of Directors of the Company, having considered the profitability and liquidity position of the Group, recommends a payment of dividend for the year 2017 total dividend in the amount of Russian Roubles per ordinary share/gdr, amounting to a total dividend of RUB 8,016,530 thousand, including final dividend for 2017 in the amount of RUB 4,155,726 thousand or RUB per ordinary share/gdr and a special final dividend in the amount of RUB 3,860,804 thousand or RUB per ordinary share/gdr. Such dividends shall be paid in US Dollars at the rate as at the date of Annual General Meeting, subject to the approval of the shareholders at the Annual General Meeting on 23 April Share capital As at 31 December 2017 the issued share capital of the Company which remains unchanged from the prior year, comprised 178,740,916 ordinary shares with a par value of US$0.10 per share. Research and development activities The Group has not undertaken any research and development activities during the year ended 31 December Events after the balance sheet date The events after the balance sheet date are disclosed in Note 31 to the consolidated financial statements. Branches The Group operates through branches and representative offices, maintaining eleven branches and eight representative offices during 2017 (eleven branches and ten representative offices during 2016). Treasury shares In 2017 the Company did not own or acquire either directly or through a person in his own name, but on Company s behalf any of its own shares. Going concern Directors have access to all information necessary to exercise their duties. The Directors continue to adopt the going concern basis in preparing the consolidated financial statements based on the fact that, after making enquiries and following a review of the Group s budget for 2018, including cash flows and borrowing facilities, the Directors consider that the Group has adequate resources to continue in operation for the foreseeable future. Auditors The Independent Auditors, PricewaterhouseCoopers Limited, have expressed their willingness to continue in office. A resolution giving authority to the Board of Directors to fix their remuneration will be proposed at the Annual General Meeting. Corporate governance Globaltrans Board of Directors adopted the Company s Code of Corporate Governance (the Code ), guaranteeing that the interests of all shareholders are given due consideration. Although the Code is based on principles recommended by the UK Corporate Governance Code (formerly the Combined Code), this does not constitute voluntary compliance with such governance code. Globaltrans corporate governance policies and practices are designed to ensure that the Group upholds its responsibilities to shareholders. As such, all employees are required to comply with these guidelines and the Group s management team takes responsibility for ensuring that all departments adhere to these standards. These key principles are promoted and applied across all levels of the Group in order to establish effective and transparent corporate governance. In January 2010, the Board supplemented its Code of Corporate Governance with a corporate policy on the treatment of the rights of its non-controlling shareholders; this aims to ensure fair treatment of the rights of non-controlling shareholders of the Company. Consolidated management report and consolidated financial statements for the year ended 31 December

11 Full details of our governance policies can be found at The role of the Board of Directors The Group is managed by the Board of Directors which is collectively responsible to the shareholders for the success of the Group. The Board sets the strategic objectives and ensures that the necessary resources are in place to enable these objectives to be met. The Board is fully involved in decision making in the most important areas of business and conducts regular reviews of the Group s operational and financial performance. One of the Board s key responsibilities is to ensure that there is in place a system of prudent and effective risk controls that enable risks to be identified, assessed and managed appropriately. Members of the Board of Directors As at 31 December 2017 and at the date of this report, the Board comprises 14 members (2016: 14 members), 10 (2016: 11 members) of whom are non-executive directors (including the Chairman). Four (2016: four) of the nonexecutive directors are independent, they have no relationship with the Company, its related companies or their officers that could interfere, or be reasonably perceived to interfere, with the exercise of the director s independent business judgment with a view to the best interests of the Company, and they are able to exercise objective judgment on corporate affairs independently from management. The members of the Board of Directors at 31 December 2017 and at the date of this report are shown on page 1. There were no significant changes in the assignment of responsibilities of the Board of Directors. There is no provision in the Company s Articles of Association for retirement of Directors by rotation; however, in accordance with the Terms of reference of the Board of Directors all board members are required to submit for reelection at least once every three years. Should a non-executive Director serve any term beyond six years, his/her reelection would be subject to particularly rigorous review. In practice, all current appointments are for one year and all directors will stand for re-election at the forthcoming Annual General Meeting of shareholders of the Company. The total gross remuneration of the members of the Board of Directors incurred by the Group in 2017 amounted to RUB 130,387 thousand (2016: RUB 131,382 thousand). Board performance The Board held 14 meetings in The Directors attendance is presented in the table below. Eligible Attended Michael Zampelas (chairman) Johann Franz Durrer Carroll Colley George Papaioannou Alexander Eliseev Melina Pyrgou Konstantin Shirokov Alexander Storozhev Marios Tofaros Elia Nicolaou Sergey Tolmachev Andrey Gomon Zarema Mamukaeva 3 3 Alexander Tarasov Michael Thomaides Consolidated management report and consolidated financial statements for the year ended 31 December

12 The Board Committees The Board has established three committees: the Audit Committee, the Nomination Committee and the Remuneration Committee. A brief description of the terms of reference of the committees is set out below. Audit Committee The Audit Committee comprises three Directors, two of whom are independent, and meets at least four times each year. The Audit Committee is chaired by Mr. J. Carroll Colley and is also attended by Mr. Papaioannou and Ms. Nicolaou. The Audit Committee is responsible for considering, among other matters: the integrity of the Company s financial statements, including its annual and interim accounts, and the effectiveness of the Company s internal controls and risk management systems; auditors reports and the terms of appointment and remuneration of the auditor. The Committee supervises, monitors and advises the Board on risk management and control systems and the implementation of codes of conduct. In addition, the Audit Committee supervises the submission by the Company of financial information and a number of other audit-related issues. The Audit Committee is also responsible for assessing the efficiency of the performance of the Chairman of the Board. The Audit Committee manages the relationship with the external auditor on behalf of the Board. It considers the reappointment of the external auditor each year, as well as remuneration and other terms of engagement, and makes a recommendation to the Board. Shareholders are asked to approve the reappointment of the auditor each year at the Annual General Meeting. The Internal Audit function is carried out internally by the Group s Internal Audit Service ( IAS ). IAS is responsible for testing the systems of risk management, internal control and corporate governance of the Group. Nomination Committee The Nomination Committee comprises two Independent Directors and meets at least once a year. The Nomination Committee is chaired by Dr. Durrer and Mr. Zampelas is the other member. The Committee s remit is to prepare selection criteria and appointment procedures for members of the Board and to review on a regular basis the structure, size and composition of the Board. In undertaking this role, the Committee refers to the skills, knowledge and experience required of the Board, given the Company s stage of development, and makes recommendations to the Board as to any changes. The Committee also considers future appointments in respect of the Board s composition and makes recommendations regarding the membership of the Audit and Remuneration Committees. Remuneration Committee The Remuneration Committee comprises two Independent Directors and meets at least once a year. The Remuneration Committee is chaired by Dr. Durrer and Mr. Zampelas is the other member. The Committee s responsibility is the determination and review of, among other matters, the remuneration of Executive Directors, and the review of the Company s remuneration policies. The remuneration of Independent Directors is a matter for the Chairman of the Board and the Executive Directors. No Director or manager may be involved in any decisions as to his/her own remuneration. Board and Management Remuneration Non-executive directors serve on the Board pursuant to the letters of appointment which are subject to approval by the shareholders at the Annual General Meeting. Such letters of appointment specify the terms of appointment and the remuneration of non-executive directors. Appointments are for one year. Levels of remuneration for Non-Executive Directors reflect the time commitment, responsibilities of the role and membership of the respective committees of the Board. Directors are also reimbursed for expenses associated with discharge of their duties. The shareholders of the Company approved the remuneration of the members of the Board of Directors at the Annual General Meeting of shareholders held on 24 April Refer to Note 30 of the consolidated financial statements for details of remuneration of directors and other key management personnel. Consolidated management report and consolidated financial statements for the year ended 31 December

13 Diversity policy The Company does not have a formal Board diversity policy to aspects such as age, gender or educational and professional backgrounds, but following best practice while making the new appointments and considering the current composition of the Board of Directors, these aspects are taken into account. As of the date of publication of these financial statements the Board has 2 females representing approximately 14% from the total number of directors. The age of the members of the Board of Directors ranges from over 30 to over 70 years, with the average age of directors being 51 years. The Board members have the following educational backgrounds: transportation and ports industry, accounting, economics and financial, banking sector and legal, engineering and mechanics, biophysics and mathematics, history, international affairs and risk management. Further details of the corporate governance regime of the Company can be found on the website: Regulations with regards to the amendment of the article of association The Articles of Association of the Company may be amended from time to time by special resolution at the General Meeting of the Shareholders. Company s internal control and risk management systems in relation to the financial reporting process The Board of Directors is responsible for the preparation of the consolidated financial statements that give a true and fair view in accordance with International Financial Reporting Standards as adopted by the European Union and the requirements of the Cyprus Companies Law, Cap. 113, and for such internal control as the Board of Directors determines is necessary to enable the preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or error. In preparing the consolidated financial statements, the Board of Directors is responsible for assessing the Group s ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless the Board of Directors either intends to liquidate the Group or to cease operations, or has no realistic alternative but to do so. Those charged with governance are responsible for overseeing the Group s financial reporting process. The Board is primarily responsible for establishing a framework of prudent and effective controls that enables risks to be assessed and managed. The Audit Committee assists the Board in this task by reviewing and assessing the Group s internal control and risk management processes in relation to Group s financial reporting process. The system of controls is designed to manage rather than eliminate the risks relevant to the Group s operations and, therefore, can only provide reasonable, and not absolute, assurance against material errors, losses, fraud or breaches of laws and regulations. At Globaltrans, the body responsible for internal audit is the Internal Audit Service (IAS). It tests the Group s systems of risk management, internal control and corporate governance to obtain a reasonable assurance that: The risk management system functions efficiently; Material financial, management and operating information is accurate, reliable and up-to-date; The actions of employees and management bodies are in compliance with the Group s policies, standards and procedures and the applicable laws; Resources are procured reasonably and used efficiently and their safekeeping is fully guaranteed; and Group companies conduct their business in compliance with applicable laws. Each year, the Audit Committee approves an internal audit plan, which is developed by identifying the audit universe, performing a risk analysis and obtaining input from management relative to risks, controls and governance processes. The internal auditor regularly reports to the Audit Committee on the progress of planned audits. If any material internal control deficiencies are identified, they are communicated to the Audit Committee, and consequently to the Board, at once. Consolidated management report and consolidated financial statements for the year ended 31 December

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16 Independent Auditor s Report To the Members of Report on the Audit of the Consolidated Financial Statements Our opinion In our opinion, the accompanying consolidated financial statements of (the Company ) and its subsidiaries (together the Group ) give a true and fair view of the consolidated financial position of the Group as at 31 December 2017, and of its consolidated financial performance and its consolidated cash flows for the year then ended in accordance with International Financial Reporting Standards (IFRSs) as adopted by the European Union and the requirements of the Cyprus Companies Law, Cap What we have audited We have audited the consolidated financial statements which are presented in pages 23 to 80 and comprise: the consolidated balance sheet as at 31 December 2017; the consolidated income statement for the year then ended; the consolidated statement of comprehensive income for the year then ended; the consolidated statement of changes in equity for the year then ended; the consolidated cash flow statement for the year then ended; and the notes to the consolidated financial statements, which include a summary of significant accounting policies. The financial reporting framework that has been applied in the preparation of the consolidated financial statements is International Financial Reporting Standards as adopted by the European Union and the requirements of the Cyprus Companies Law, Cap Basis for opinion We conducted our audit in accordance with International Standards on Auditing (ISAs). Our responsibilities under those standards are further described in the Auditor s Responsibilities for the Audit of the Consolidated Financial Statements section of our report. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. Independence We remained independent of the Group throughout the period of our appointment in accordance with the International Ethics Standards Board for Accountants Code of Ethics for Professional Accountants (IESBA Code) together with the ethical requirements that are relevant to our audit of the consolidated financial statements in Cyprus and we have fulfilled our other ethical responsibilities in accordance with these requirements and the IESBA Code. PricewaterhouseCoopers Ltd, City House, 6 Karaiskakis Street, CY-3032 Limassol, Cyprus P O Box 53034, CY-3300 Limassol, Cyprus T: , F: , PricewaterhouseCoopers Ltd is a private company registered in Cyprus (Reg. No ). Its registered office is at 3 Themistocles Dervis Street, CY-1066, Nicosia. A list of the company s directors, including for individuals the present and former (if any) name and surname and nationality, if not Cypriot and for legal entities the corporate name, is kept by the Secretary of the company at its registered office. PwC refers to the Cyprus member firm, PricewaterhouseCoopers Ltd and may sometimes refer to the PwC network. Each member firm is a separate legal entity. Please see for further details.

17 Our audit approach Overview As part of designing our audit, we determined materiality and assessed the risks of material misstatement in the consolidated financial statements. In particular, we considered where the Board of Directors made subjective judgements; for example, in respect of significant accounting estimates that involved making assumptions and considering future events that are inherently uncertain. As in all of our audits, we also addressed the risk of management override of internal controls, including among other matters, consideration of whether there was evidence of bias that represented a risk of material misstatement due to fraud. Overall group materiality: RUB 886,000 thousand, which represents approximately 5% of profit before tax as adjusted for the non-recurring reversal of impairment of intangible assets We conducted full scope audit for the parent entity, all the significant components and the group consolidation. For the non-significant components we performed specified procedures over specific financial statement lines and/or analytical procedures. We have identified the disclosure of the impact of adoption of IFRS 15 Revenue from contracts with customers as the key audit matter. Materiality The scope of our audit was influenced by our application of materiality. An audit is designed to obtain reasonable assurance whether the consolidated financial statements are free from material misstatement. Misstatements may arise due to fraud or error. They are considered material if individually or in aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of the consolidated financial statements. Based on our professional judgement, we determined certain quantitative thresholds for materiality, including the overall group materiality for the consolidated financial statements as a whole as set out in the table below. These, together with qualitative considerations, helped us to determine the scope of our audit and the nature, timing and extent of our audit procedures and to evaluate the effect of misstatements, both individually and in aggregate on the consolidated financial statements as a whole. 15